<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended August 31, 1999 Commission File Number 0-8796
Spectrum Control, Inc.
Exact name of registrant as specified in its charter
Pennsylvania 25-1196447
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8031 Avonia Road; Fairview, Pennsylvania 16415
(Address) (Zip Code)
Registrant's telephone number, including area code: (814) 835-1650
Former name, former address and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Number of Shares Outstanding
Class as of September 15, 1999
Common, no par value 10,916,842
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets --
August 31, 1999 and November 30, 1998 3-4
Condensed Consolidated Statements of Income --
Three Months Ended and Nine Months Ended 5
August 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows --
Three Months Ended and Nine Months Ended 6
August 31, 1999 and 1998
Notes to Condensed Consolidated Financial
Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
August 31 November 30
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 82 $ 739
Accounts receivable, net of
allowances 18,375 10,162
Inventories
Finished goods 4,356 2,581
Work-in-process 7,443 5,070
Raw materials 11,496 5,234
Total inventories 23,295 12,885
Prepaid expenses and other
current assets 831 593
Total current assets 42,583 24,379
PROPERTY, PLANT AND EQUIPMENT,
at cost less accumulated
depreciation of $19,488
in 1999 and $16,631 in 1998 20,994 16,289
OTHER ASSETS
Goodwill 13,498 2,547
Patents and patent rights 327 255
Debt issuance costs 415 139
Defered income taxes 383 383
Deferred charges 298 147
Total other assets 14,921 3,471
TOTAL ASSETS $78,498 $44,139
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
August 31 November 30
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $ 2,260 $ 336
Accounts payable 9,559 2,719
Accrued salaries and wages 2,115 1,438
Accrued interest 96 63
Accrued federal and state
income taxes 107 93
Accrued other expenses 383 281
Current portion of long-term debt 3,430 830
Total current liabilities 17,950 5,760
LONG-TERM DEBT 20,270 2,500
DEFERRED INCOME TAXES 2,486 2,105
STOCKHOLDERS' EQUITY
Common stock, no par value,
authorized 25,000,000 shares,
issued 10,986,842 shares in 1999
and 10,957,008 in 1998 14,548 14,470
Retained earnings 23,768 19,798
Treasury stock, 70,000 shares in
1999 and 1998, at cost (294) (294)
38,022 33,974
Accumulated other comprehensive
income
Foreign currency translation
adjustment (230) (200)
Total stockholders' equity 37,792 33,774
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $78,498 $44,139
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
(Dollars in Thousands Except Per Share Data)
Three Months Ended Nine Months Ended
August 31 August 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $28,891 $14,023 $68,758 $43,854
Cost of products sold 20,817 9,791 49,261 30,462
Gross margin 8,074 4,232 19,497 13,392
Selling, general and
administrative expense 5,005 2,731 12,251 8,615
Income from operations 3,069 1,501 7,246 4,777
Other income (expense)
Interest expense (512) (54) (900) (165)
Other income and expense,
net 23 48 58 82
(489) (6) (842) (83)
Income before provision
for income taxes 2,580 1,495 6,404 4,694
Provision for
income taxes 983 580 2,434 1,764
Net income $ 1,597 $ 915 $ 3,970 $2,930
Earnings per common share:
Basic $ 0.15 $ 0.08 $ 0.36 $ 0.27
Diluted $ 0.14 $ 0.08 $ 0.36 $ 0.27
Dividends declared per
common share $ - $ - $ - $ -
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
Three Months Ended
August 31
1999 1998
<S> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 1,827 $ 6,721
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property, plant
and equipment (3,575) (2,419)
Payment for acquired
businesses (20,958) (1,159)
Net cash used in investing
activities (24,533) (3,578)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net borrowings (repayment)of
short-term debt 1,613 (40)
Borrowings of long-term debt 20,800 -
Repayment of long-term debt (430) (306)
Net proceeds from issuance
of common stock 78 411
Net cash provided by
financing activities 22,061 65
Effect of Exchange Rate
Changes on Cash (12) 14
Net Increase (Decrease)
in Cash and Cash Equivalents (657) 3,222
Cash and Cash Equivalents,
Beginning of Period 739 196
Cash and Cash Equivalents,
End of Period $ 82 $ 3,418
Cash Paid During the Period For:
Interest $ 867 $ 161
Income taxes 2,168 1,101
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1999
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the accompanying
financial statements include all adjustments which are normal, recurring and
necessary to present fairly the results for the interim periods. Operating
results for interim periods are not necessarily indicative of the results that
may be expected for the year.
The balance sheet at November 30, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
notes thereto included in the Spectrum Control, Inc. and Subsidiaries annual
report on Form 10-K for the fiscal year ended November 30, 1998.
Note 2 - Principles of Consolidation
The condensed consolidated financial statements include the accounts of
Spectrum Control, Inc. and its Subsidiaries (the Company). To facilitate
timely reporting, the fiscal quarters of a foreign subsidiary are based upon a
fiscal year which ends October 31. All significant intercompany accounts are
eliminated upon consolidation.
Note 3 - Foreign Currency Translation
The assets and liabilities of the Company's foreign operations are translated
into U.S. dollars at current exchange rates. Revenue and expense accounts of
these operations are translated at average exchange rates prevailing during the
period. These translation adjustments are accumulated in a separate component
of stockholders' equity. Foreign currency transaction gains and losses are
included in determining net income for the period in which the exchange rate
changes.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4 - Acquisition
On March 26, 1999, the Company acquired substantially all of the assets of the
Signal Conditioning Products Division ("SCPD") of AMP Incorporated ("AMP").
AMP is a world leader in the manufacture of electrical, electronic, fiber-optic
and wireless interconnection devices and systems. Through SCPD, AMP
manufactured and sold a broad line of electromagnetic interference ("EMI")
filters, filtered arrays, filtered connectors, and related products.
The aggregate cash purchase price of the acquired assets, including related
acquisition costs, was approximately $20.7 million. To finance the
acquisition, the Company secured a $20.0 million term loan from its principal
lending institution. The term loan bears interest at variable rates at or
below the prevailing prime rate and requires quarterly principal payments of
$909,000 from December 26, 1999 through March 26, 2005.
The aggregate purchase price of the acquisition has been allocated to the
acquired assets based upon their respective fair market values. The excess of
the aggregate purchase price over the fair value of the net assets acquired
(goodwill) amounted to approximately $12.0 million and is being amortized
ratably over a period of 20 years.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of the acquired business have been included in the
accompanying financial statements since the date of acquisition. The following
unaudited pro forma consolidated results of operations have been prepared as if
the acquisition had occurred as of the beginning of fiscal 1999 and 1998,
respectively (in thousands, except per share data):
Nine Months Ended
August 31
1999 1998
Net sales $ 73,825 $ 61,547
Net income 3,736 2,527
Earnings per common share:
Basic 0.34 0.23
Diluted 0.34 0.23
The above amounts are based upon certain assumptions and estimates, and do not
reflect any benefits from economies which might be achieved from combined
operations. The pro forma results do not necessarily represent results which
would have occurred if the acquisition had taken place on the basis assumed
above, nor are they necessarily indicative of the results of future combined
operations.
<PAGE>
<TABLE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5 - Earnings Per Common Share
The following table sets forth the computation of basic and diluted
earnings per common share for the periods indicated:
<CAPTION>
Three Months Ended Nine Months Ended
August 31 August 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator for basic and
diluted earnings per
common share
(in thousands):
Net income $ 1,597 $ 915 $ 3,970 $ 2,930
Denominator for basic
earnings per common
share (in thousands):
Weighted average
shares outstanding 10,908 10,951 10,895 10,902
Denominator for diluted
earnings per common
share (in thousands):
Weighted average
shares outstanding 10,908 10,951 10,895 10,902
Effect of dilutive
stock options 178 88 118 127
11,086 11,039 11,013 11,029
Earnings per common share:
Basic $ 0 .15 $ 0 .08 $ 0 .36 $ 0 .27
Diluted
$ 0 .14 $ 0 .08 $ 0 .36 $ 0 .27
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 6- Comprehensive Income
The following table sets forth the computation of comprehensive income
for the periods indicated (in thousands):
Three Months Ended Nine Months Ended
August 31 August 31
1999 1998 1999 1998
Net income $ 1,597 $ 915 $ 3,970 $ 2,930
Foreign currency
translation adjustment 24 19 (30) (75)
Comprehensive income $ 1,621 $ 934 $ 3,940 $ 2,855
Note 7- Operating Segments
The following table sets forth reportable segment information for the
periods indicated (in thousands):
Three Months Ended August 31: Interconnect Control
Products Products Total
1999
Revenue from unaffiliated
customers $19,560 $ 8,952 $ 28,512
Segment income 5,764 2,259 8,023
1998
Revenue from unaffiliated
customers 9,694 3,774 13,468
Segment income 3,851 919 4,770
Nine Months Ended August 31:
1999
Revenue from unaffiliated
customers 45,371 22,184 67,555
Segment income 15,145 5,107 20,252
1998
Revenue from unaffiliated
customers 32,076 10,670 42,746
Segment income 12,734 2,200 14,934
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
The following table sets forth the reconciliation of total reportable
segment income to consolidated income before provision for income taxes
for the periods indicated (in thousands):
<CAPTION>
Three Months Ended Nine Months Ended
August 31 August 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Total income for
reportable segments $ 8,023 $ 4,770 $ 20,252 $ 14,934
Unallocated amounts:
Manufacturing expense
related to the
Company's ceramic
capacitor operations (748) (951) (2,709) (2,717)
Selling, general and
administrative expense (4,206) (2,318) (10,297) (7,440)
Interest expense (512) (54) (900) (165)
Other income 23 48 58 82
Consolidated income
before provision
for income taxes $ 2,580 $ 1,495 $ 6,404 $ 4,694
<FN>
For the periods indicated above, there were no material changes to the
accounting policies and procedures used to determine segment income.
Substantially all of the tangible assets and related operations of the
Signal Conditioning Products Division of AMP Incorporated, acquired by the
Company on March 26,1999, have been included in the Interconnect
Products business segment.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis may be understood more fully by reference
to the consolidated financial statements, notes to the consolidated financial
statements, and management's discussion and analysis contained in the Spectrum
Control, Inc. and Subsidiaries annual report on Form 10-K for the fiscal year
ended November 30, 1998.
General
Spectrum Control, Inc. and its Subsidiaries (the "Company") design, manufacture
and market a broad line of control products and systems. The Company was
founded as a solutions-oriented company, designing and manufacturing products
to suppress or eliminate electromagnetic interference ("EMI"). The Company has
expanded its core EMI filter technology into a complete line of interconnect
filter products (discrete filters, filtered arrays, and filtered connectors).
In recent years, the Company broadened its focus by developing new lines of
power products (power distribution units, power entry modules, power line
filters, commercial custom assemblies, and military/aerospace multisection
assemblies), microwave products (coaxial ceramic bandpass filters, duplexers,
and dielectric resonators), and specialty ceramic capacitors (single layer,
temperature compensating, high voltage, and switch mode). The Company's
products are used in virtually all industries worldwide, including
telecommunications, aerospace, military, medical, computer, and industrial
controls.
On March 26, 1999, the Company acquired substantially all of the assets of the
Signal Conditioning Products Division ("SCPD") of AMP Incorporated ("AMP").
AMP is a world leader in the manufacture of electrical, electronic, fiber-optic
and wireless interconnection devices and systems. Through SCPD, AMP
manufactured and sold a broad line of EMI interconnect filter products. The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of the acquired business have been included in the Company's
financial statements since the date of acquisition.
Forward-Looking Information
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward-looking statements which reflect
management's current views with respect to future operating performance,
ongoing cash requirements, and the Year 2000 Issue. The words "believe",
"expect", "anticipate" and similar expressions identify forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from
historical results or those anticipated. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors That
May Affect Future Results", as well as those discussed elsewhere herein.
Readers are cautioned not to place undue reliance on these forward-looking
statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations
<TABLE>
The following table sets forth certain financial data, as a percentage
of net sales, for the three months ended and nine months ended August 31, 1999
and 1998:
<CAPTION>
Three Months Ended Nine Months Ended
August 31 August 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 72.1 69.8 71.7 69.5
Gross margin 27.9 30.2 28.3 30.5
Selling, general and
administrative expense 17.3 19.5 17.8 19.6
Income from operations 10.6 10.7 10.5 10.9
Other income (expense)
Interest expense (1.8) (0.4) (1.3) (0.4)
Other income and
expense, net 0.1 0.3 0.1 0.2
Income before provision
for income taxes 8.9 10.6 9.3 10.7
Provision for income taxes 3.4 4.1 3.5 4.0
Net income 5.5% 6.5% 5.8% 6.7%
</TABLE>
Third Quarter 1999 Versus Third Quarter 1998
Net Sales
Net sales increased $14.9 million or 106.0% during the period, with
consolidated net sales of $28.9 million in the third quarter of 1999 and $14.0
million in the comparable quarter of 1998. Of this increase, $9.4 million was
generated from the sale of SCPD products, with the remaining $5.5 million
primarily generated from the sale of power products. These power products are
principally used in communications equipment, including telecommunication racks
and power supplies. Overall demand for the Company's products was very strong
during the period with total customer orders of $31.6 million received in the
third quarter of 1999, an $18.0 million or 131.6% increase from the third
quarter of last year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Gross Margin
Gross margin was $8.1 million or 27.9% of sales in the third quarter of 1999,
compared to $4.2 million or 30.2% of sales in the comparable quarter of 1998.
During the third quarter of 1999, the Company continued the integration of SCPD
into its Interconnect Products Division. As a result of this integration, the
Company incurred certain changes in sales mix, production inefficiencies, and
yield losses which negatively impacted gross margin as a percentage of sales.
The integration of SCPD is expected to continue throughout fiscal 1999, with
anticipated completion by November 30, 1999. Accordingly, management
anticipates gross margin percentages for the remainder of 1999 to approximate
28.0% to 29.0% of sales.
Selling, General and Administrative Expense
As a result of greater sales volume, selling expense increased during the
period. In the third quarter of 1999, selling expense amounted to $2.5 million
or 8.5% of sales, compared to $1.6 million or 11.6% of sales in the same
quarter of 1998. The decrease in selling expense, as a percentage of sales ,
principally reflects economies of scale realized with the additional sales
volume. General and administrative expense was approximately $2.5 million in
the third quarter of 1999, compared to $1.1 million in the comparable quarter
of 1998. Of this increase, approximately $200,000 arises from the
amortization of goodwill recognized in connection with the Company's
acquisition of SCPD in March 1999 and Potter Production Corporation in
September 1998. The remaining increase in general and administrative expense
primarily reflects additional personnel costs, professional fees and other
operating expenses associated with the Company's increased business activity.
Other Income and Expense
To finance the acquisition of SCPD, the Company secured a $20.0 million term
loan from its principal lending institution. The six year term loan bears
interest at variable rates at or below the prevailing prime rate. Primarily as
a result of this indebtedness, interest expense increased $458,000 during the
period, from $54,000 in 1998 to $512,000 in 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Nine Months 1999 Versus Nine Months 1998
Net Sales
For the first nine months of 1999 net sales increased $24.9 million or 56.8%,
with net sales of $68.8 million in 1999 and $43.9 million in 1998. Of this
increase, $14.8 million was generated from the sale of SCPD products, with the
remaining $10.1 million associated with the Company's power product offerings
(power distribution units, intelligent power management and conditioning
products, commercial custom assemblies, and other value-added assemblies).
These power products are primarily sold to original equipment manufacturers of
telecommunications equipment. In 1999, customer order rates increased for
virtually all of the Company's major product lines. For the first thirty-nine
weeks of fiscal 1999, the Company received customer orders of $85.4 million, an
increase of $41.0 million or 92.0% from the comparable period of 1998. Of this
increase, approximately $22.1 million was generated by the Company's
interconnect filter products and the remaining $18.9 million from the Company's
power and microwave product offerings. In addition, during the first nine
months of 1999, the Company assumed approximately $5.1 million of customer
order backlog in connection with the acquisition of SCPD.
Gross Margin
For the first nine months of 1999, gross margin was $19.5 million or 28.3% of
sales, compared to $13.4 million or 30.5% for the comparable period of 1998.
The decrease in gross margin percentage reflects several factors, of relative
equal significance, including: changes in sales mix and additional production
costs incurred during the integration of SCPD into the Company's Interconnect
Products Division; changes in sales mix from the Company's interconnect filter
products to its power product offerings; and yield losses and resultant higher
labor costs incurred at the Company's Ceramic Components Division in New
Orleans, Louisiana.
Selling, General and Administrative Expense
With additional sales volume, selling expense increased during the period.
During the first nine months of 1999, selling expense amounted to $6.6 million
or 9.6% of sales, compared to $4.9 million or 11.2% of sales for the same
period last year. General and administrative expense amounted to $5.6 million
in the first nine months of fiscal 1999, compared to $3.7 million in the
comparable period of 1998. Of this $1.9 million increase, approximately
$400,000 arises from the amortization of goodwill in connection with the
Company's recent acquisitions. The remaining increase in general and
administrative expense primarily reflects additional personnel costs,
professional fees and other operating expenses associated with the Company's
increased business volume.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Other Income and Expense
As previously indicated, the Company secured a $20.0 million term loan to
substantially finance the acquisition of SCPD. Principally as a result of
incurring this debt, interest expense increased $735,000 during the period,
from $165,000 in 1998 to $900,000 in 1999. Average short-term borrowings and
interest rates increased slightly throughout the period.
Income Taxes
The Company's effective income tax rate was 38.0% in 1999 and 37.6% in 1998,
compared to an applicable statutory income tax rate of approximately 40.0%.
Differences in the effective tax rates and statutory income tax rate
principally arise from state tax provisions and foreign income tax rates.
Risk Factors That May Affect Future Results
The Company's results of operations may be affected in the future by a variety
of factors including: competitive pricing pressures, new product offerings by
the Company and it's competitors, new technologies, product cost changes,
changes in the overall economic climate, availability of raw materials, and
changes in product mix. In 1999, management expects approximately 60.0% of the
Company's sales will be to customers in the telecommunication industry.
Accordingly, any significant change in the telecommunication industry's
activity level would have a direct impact on the Company's performance.
Liquidity, Capital Resources and Financial Condition
The Company has a $6.0 million line of credit with PNC Bank N.A. of Erie,
Pennsylvania (the "Bank"). The revolving credit line is collateralized by
substantially all of the Company's tangible and intangible property, with
interest rates on borrowings at or below the Bank's prevailing prime rate. At
August 31, 1999, the Company had borrowed $1.9 million under this financing
arrangement. The current line of credit agreement expires March 26, 2002.
The Company's wholly-owned foreign subsidiary maintains unsecured Deutsche Mark
lines of credit with several German financial institutions aggregating $1.6
million (3.0 million DM). At August 31, 1999, the Company had borrowed $54,000
(98,000 DM) under these lines of credit. Borrowings under the lines of credit
bear interest at rates below the prevailing prime rate and are payable upon
demand.
The Company's working capital continued to increase during the period. At
August 31, 1999, the Company had net working capital of $24.6 million, compared
to $18.6 million at November 30, 1998. The Company's current ratio remained
strong during the first nine months of fiscal 1999, with current assets at 2.37
times current liabilities at August 31, 1999, compared to 4.23 at November 30,
1998.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
As a result of increased working capital requirements, the Company's operating
cash flow decreased during the period. During the first nine months of 1999,
net cash generated from operations amounted to $1.8 million compared to $6.7
million for the comparable period of 1998. During the first nine months of
1999, inventories increased by approximately $5.1 million from operations. The
increase in inventories primarily reflects additional customer consigned
inventory requirements, as well as additional raw material and work-in-process
inventories to support anticipated future shipment requirements.
During the first nine months of fiscal 1999, the Company's cash expenditures
for property, plant and equipment amounted to $3.6 million. These capital
expenditures primarily related to metal fabrication machinery and other
manufacturing equipment for capacity expansion at the Company's Control
Products Division, as well as construction of the Company's new corporate
headquarters facility in Fairview, Pennsylvania.
As previously indicated, the Company acquired substantially all of the assets
of the Signal Conditioning Products Division of AMP Incorporated on March 26,
1999. The aggregate cash purchase price of the acquired assets was
approximately $20.7 million. To finance the acquisition, the Company secured a
$20.0 million term loan from its principal lending institution (PNC Bank N.A.
of Erie, Pennsylvania), of which $10.0 million was later syndicated to M&T Bank
of Buffalo, New York. The term loan bears interest at variable rates at or
below the prevailing prime rate and requires quarterly principal payments of
$909,000 from December 26, 1999 through March 26, 2005.
On March 26, 1999, the Company entered into a credit agreement with PNC Bank,
N.A. covering the $20.0 million term loan and the Company's $6.0 million
revolving credit facility (the "Agreement"). The Agreement requires the
Company to comply with certain covenants. These covenants generally restrict
the Company from granting additional liens on its assets, disposing of assets
other than in the ordinary course of business, and incurring additional
indebtedness other than purchase money indebtedness and debt not exceeding $5.0
million in the aggregate. The Agreement also imposes certain restrictions on
future acquisitions by the Company. In addition, the Agreement requires the
Company to meet the following quarterly financial covenants: maintain a
minimum net worth of $28.0 million plus 50% of the Company's net income for
each fiscal year ending after November 30, 1998; maintain a minimum ratio of
EBITDA (earnings before interest, taxes, depreciation, and amortization) to
fixed charges of 1.2 to 1.0; and maintain a maximum ratio of total
indebtedness to EBITDA of 3.5 to 1.0. As of August 31, 1999, the Company was
in compliance with all covenants contained in the Agreement.
Current financial resources, including working capital and existing lines of
credit, and anticipated funds from operations are expected to be sufficient to
meet operating cash requirements throughout 1999, including scheduled long-term
debt repayment and planned capital expenditures. There can be no assurance,
however, that unplanned capital replacement or other future events will not
require the Company to seek additional debt or equity financing and, if so
required, that it will be available on terms acceptable to the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Quantitative and Qualitative Disclosures About Market Risk
<TABLE>
The Company's major market risk exposure is primarily due to possible
fluctuations in interest rates. The Company's policy is to manage interest
rate risk by utilizing interest rate swap agreements to convert a portion of
the floating interest rate debt to fixed interest rates. The Company does not
enter into derivative financial instruments for trading or speculative
purposes. The interest rate swap agreements are entered into with major
financial institutions thereby minimizing the risk of credit loss.
The following table presents information about the Company's market sensitive
financial instruments. The table sets forth the principal and notional amounts,
as well as the year of maturity and applicable interest rates for all
significant financial and derivative financial instruments in effect as of
August 31, 1999:
<CAPTION>
Year of Maturity
Description 2000 2001 2002 2003 Thereafter
<S> <C> <C> <C> <C> <C>
Revolving credit
facility:
Principal amount $1,900,000
Actual floating
rate
Euro-rate portion 5.35%
Term loan:
Principal amount $3,636,000 $3,636,000 $3,636,000 $3,636,000 $5,456,000
Actual floating
rate
Euro-rate portion 5.35% 5.35% 5.35% 5.35% 5.35%
Interest rate swap
agreement:
PNC Bank, N.A.
Notional amount $3,636,000 $3,636,000 $2,728,000
Actual fixed
interest pay
rate 5.89% 5.89% 5.89%
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Impact of Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result, any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
prepare invoices, or engage in similar normal business activities.
The Company has completed an assessment and determined that it will have to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company presently believes that with modifications and replacement of existing
software, the Year 2000 Issue can be mitigated. However, if such modifications
and replacements are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves four phases:
assessment, remediation, testing, and implementation. To date, the Company has
fully completed its assessment of all material systems that could be affected
by the Year 2000 Issue. The completed assessment indicated that most of the
Company's significant information technology systems could be affected. The
assessment also indicated that software used in certain manufacturing equipment
(hereafter also referred to as operating equipment) is also at risk. If not
resolved on a timely basis, these systems could hamper the Company's ability to
manufacture and ship product from which the Company derives a significant
portion of its revenues.
.
For its information technology exposures, the Company has completed the
remediation phase for all material systems including required software
reprogramming and replacement. After completing the reprogramming and
replacement of software, the Company commenced the testing and implementation
of its information technology systems. As of August 31, 1999, the Company has
completed all of its testing and has fully implemented its remediated systems.
With respect to operating equipment, the Company has completed the remediation
and testing phases of the resolution process. Implementation of affected
equipment is expected to be completed by September 30, 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company has queried its important suppliers and vendors to assess their
Year 2000 readiness. To date, the Company is not aware of any problems that
would materially impact results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that these suppliers and vendors
will be Year 2000 ready. The inability of those parties to complete their Year
2000 resolution process could materially impact the Company.
The Company is utilizing both internal and external resources to reprogram or
replace, test, and implement the software and operating equipment for Year 2000
modifications. Management anticipates that its total year 2000 project costs
will not be material.
The Company's plans to complete Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. Estimates on the status of completion and the expected
completion dates are based on hours expended to date compared to total expected
hours. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel training in this area, the ability
to locate and correct all relevant computer codes, and similar uncertainties.
Other Matters
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS No 133 is effective for fiscal years
beginning after June 15, 2000, with earlier application permitted.
Effective January 1, 1999, the European Monetary Union ("EMU") created a single
currency (the "Euro") for its member countries and the exchange rates of the
participating currencies have been fixed against the Euro. The EMU has
established a three year transition period from January 1, 1999 to December 31,
2001, for the introduction of the Euro.
The Company does not expect the adoption of SFAS No. 133 or the introduction of
the Euro to have a material impact on the Company's financial position or
results of operations.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit filed as part of this report is listed below:
Exhibit No. Description
27 Financial data schedule
(b) Reports on Form 8-K
On April 12, 1999, the Company filed a Current Report on
Form 8-K dated March 26, 1999, reporting the Company's acquisition of
substantially all of the assets of the Signal Conditioning Products Division
of AMP Incorporated. The Current Report did not include any financial
statements. Financial statements of the business acquired and unaudited
pro forma financial information were filed by subsequent amendment on
June 9, 1999, pursuant to Form 8-K/A. The financial statements filed
consisted of the following: Statement of Assets Purchased and Liabilities
Assumed of the Product Lines Acquired from AMP Incorporated as of
December 31, 1998; and Statements of Revenue and Direct Costs and Expenses
of the Product Lines Acquired from AMP Incorporated for the years ended
December 31, 1998 and 1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECTRUM CONTROL, INC.
(Registrant)
Date: September 20, 1999 By: /s/ John P. Freeman
John P. Freeman, Vice President
and Chief Financial Officer
(Principal Accounting and
Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Spectrum Control, Inc. Condensed Consolidated Balance Sheet (Unaudited)
at August 31, 1999 and Condensed Consolidated Statement of Income (Unaudited)
for the nine months ended August 31, 1999 and is qualified in its entirety
by reference to its Form 10-Q for the period ended August 31, 1999
</LEGEND>
<CIK> 0000092769
<NAME> SPECTRUM CONTROL, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> AUG-31-1999
<CASH> 82
<SECURITIES> 0
<RECEIVABLES> 18952
<ALLOWANCES> 577
<INVENTORY> 23295
<CURRENT-ASSETS> 42583
<PP&E> 40482
<DEPRECIATION> 19488
<TOTAL-ASSETS> 78498
<CURRENT-LIABILITIES> 17950
<BONDS> 20270
0
0
<COMMON> 14548
<OTHER-SE> 23244
<TOTAL-LIABILITY-AND-EQUITY> 78498
<SALES> 68758
<TOTAL-REVENUES> 68758
<CGS> 49261
<TOTAL-COSTS> 49261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 900
<INCOME-PRETAX> 6404
<INCOME-TAX> 2434
<INCOME-CONTINUING> 3970
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3970
<EPS-BASIC> .36
<EPS-DILUTED> .36
</TABLE>
